The Hindu Business Line : India-EU Bacchanalian cup runneth over

If the European Union delegation raises a toast to India at the Helsinki Free Trade Agreement summit tomorrow (Friday), it may not be whisky. For, one of the most contentious disputes affecting India-EU relations is the import of this alcoholic drink into India, especially the high duties.

In August, the EU warned that it would haul India before the World Trade Organisation unless New Delhi ceased to discriminate against European spirits and wines. The voice was of the EU, but the spirit was of the Edinburgh-based Scotch Whisky Association (SWA).

Mr David Williamson, Public Affairs Manager of SWA, in April 2006, warned: "If India imposes duty system for imported spirits that is not in line with its international commitments, we may be obliged to consider pressing the EU to take the matter to the WTO dispute settlement."

He was reacting in true style to the charges made by his Indian counterpart, Mr Vijay Mallya, of `imperialism' and `double standards' against the SWA, which has been unwilling to treat Indian whisky made from molasses as "whisky" for entry into the European market. Pure scotch, the argument goes, has to be made from cereals a la Scotch.

The dispute has the trappings of a corporate war, though the issues run deep. The stakes on both sides are high and, unless averted in time, may lead to protracted litigation before WTO panels.

SWA must be patient

The grievance of the makers of Scotch whiskies and European wines is over the high and multi-layered duties restricting access to the Indian market. The SWA estimates the duties at 525 per cent and alleges that it results in a tight grip over the growing domestic market by Indian producers. The SWA is aware of the burgeoning Indian middle-class, its deep pockets and its irrational attachment to Scotch.

Trade experts have advised that, considering the Indian market potential, the SWA needs to be patient in handling the dispute. However, since last year, its strategy has changed and the SWA has been readying for a full-scale war. The market for beverages is shrinking in the developed world and producers have to seek avenues in emerging economies.

For Scotland, whisky is the No.1 industry. It employs 11,000 people directly and supports another 30,000 across the UK linked to agriculture at the production end and retail trade, hotels, at the distribution end. Whisky is one of the top five exports, accounting for an annual earning of $4 billion in the last decade.

India is indeed an attractive market. "A snapshot of six emerging markets across the world shows that, even with India's exorbitant tariffs, the country still buys more Scotch whisky than Russia, China, Poland and Turkey" (www.heritage.Scotsman.com, March 5, 2006.) In 2004, India imported one million cases against 700,000 by China and 600,000 by Russia. The estimated Indian potential is 70 million cases annually.

Cultural factors led to lower demand in other emerging economies. Latin America prefers rum; and Eastern Europe vodka. The Chinese, it is reported, drink less but smoke more! As John Wakely, a top industry consultant, explained, "The one market that can change the character of the whisky industry overnight will not be China, will not be Russia, or Eastern Europe or Brazil, but India. India is where you already have a large, educated whisky-drinking public."The issue for the SWA is about the strategies to be adopted to increase the share of the Indian market, which it found to be impenetrable. Domestic distillers meet 99 per cent of the country's 100-million-case whisky market and resist the entry of foreign whisky.

Even as the SWA and its European allies are keen to pierce the Indian market, they have prevented the entry of Indian whisky into the EU through labelling requirements and by refusing to recognise Indian whisky as `whisky'. There have also been attempts to create such new barriers as geographical identification.

EC report

It is likely that the SWA hoped to engage in negotiations with Indian authorities and seek a settlement. The EU had, in fact, commenced formal consultations with an examination of India's import regime for EU spirits and wines on the basis of complaints lodged by CEPS (the European Spirits Organisation) and CEEV (Comite Europeen des Enterprises Vins) in July 2005. The investigation went on for eight months and the European Commission (EC) submitted its report to the EU.

As expected, the report, running to 104 pages, was adverse. It explained how attempts made over the past five years to resolve the problems through diplomatic channels had failed. It also added that the investigation was met with refusal by the Indian government, industry and their associations to cooperate. Further, it confirmed that the imposition of additional duty and extra additional duty constituted blatant violations of the WTO obligations.

Relying on the EC report, the European Trade Commissioner, Mr Peter Mandelson, threw his weight behind the SWA and announced, "The Commissioner urges the Indian government to consider the report and is keen to work with them to help bring their practice in line with their WTO obligations."

On July 25, 2006, the EC formally sent the report to Indian authorities. It hoped the issue could be settled through negotiation in the near future.

Alongside these consultations on trade barriers, there was a parallel channel related to a comprehensive pact on India-EU trade and economic relations, which inter alia visualised a free trade agreement (FTA) with the EU.

Mr Sajjad Karim, a Member of the European Parliament, worked on the proposal seeking new relations with India for some months and gave his report to the EC in July 2006. He visited India in April and consulted the authorities before finalising his report.

Asia-centric approach

The report calls upon the EU to enter into an FTA with India. It takes the view that negotiations on the Doha Development Agenda (DDA) are not incompatible with bilateral WTO-plus negotiations. The endeavour, as claimed, is to complement the EU's commitment to the multilateral WTO with a new generation of bilateral FTAs, especially with growing markets in Asia.

As seen from some of the related documents, the idea is that the EU cannot afford to ignore the Asian markets and lose the race to the US. There is a new Asia-centric approach, both on trade and geopolitics.

The European Parliament approved Mr Karim's report on September 28, 2006. It forms part of the agenda for the India-EU Summit scheduled on October 13.

The Indian delegation to the Summit is being led by the Prime Minister, Dr Manmohan Singh, and includes the Commerce Minister, Mr Kamal Nath. The Finnish Prime Minister and senior functionaries of the EU and the EC will lead the other side.

The Summit will signal its in-principle approval to the proposed FTA and, in keeping with diplomatic niceties and procedures, expert groups will work out formal agreements in due course.

In the changed circumstances, whisky is too small an item to spoil India-EU trade and economic relations. But there may be other twists and turns.

When the FTA and the nitty-gritty is worked out, the SWA can continue to exert pressure backstage for a larger share in sales volume and a deeper cut in Customs duties. It is indeed worth waiting for rather than going to war and losing the whole market.

(The author, a former Finance Ministry official, has extensive experience in international, finance and trade issues.)

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